Fair Trade or Bust.

Ishaan S.

Imagine you are a banana farmer in a small village. Your village mostly consists of other small banana farmers and you all sell your produce at a nearby town. Through competitive bidding from multiple small buyers, you all get to sell your bananas at good prices. Consider then, that one day, a large buyer appears, who has the capacity to buy all the bananas your village has to offer. However, he does not want to pay a fair price for it, demanding that you all sell him your product at 30% of what you sell to other buyers.

Naturally, you all scoff at his abhorrent proposal, why would you sell your product so cheap? You would rather go to other buyers and sell to them! Problem is, there are no other buyers anymore. They have all disappeared! The single large buyer has bought out all other small buyers, and now they do his bidding, refusing to buy from you. As you watch, with no-one to buy your stock, your bananas start to go bad. You have no other option but to sell to the large buyer at his terms, or risk starvation. The monopolization of the buyer strata costs you your livelihood. You need a fair value for your goods. You need fair trade.

What is Fair Trade?

Fair Trade is an organized social movement and a market based approach that advocates the payment of a "Fair Price" to producers all over the world, attempting to increase the prices that producers receive for the goods they sell (particularly in developing countries). Other goals include better credit, increased stability of earning, and promotion of institutional “capacity building”. The movement also wants to increase awareness, amongst consumers in richer countries, of development issues.

Fair Trade as a Consumer Trend

Building a health clinic in Africa, educating children in South America, empowering farmers in Philippines, and you can do all that by simply buying a slightly more expensive item on your next grocery run. It is obvious then, that fair trade manifests itself as a sub category of a much larger consumer trend : Conscientious Consumerism.

Conscientious consumerism is all about consumers around the world who believe their shopping choices can make a positive difference, be it on the environment or on the life of a farmer in a third world country. It is about being aware of the consequences of the decisions consumers make with money and choosing to spend in a responsible way. Their decisions are based on whether a product’s positioning on issues, such as the environment or method of production, align with their values, perceptions or knowledge. It is about asking themselves if their prosperity and happiness comes at a cost to others. Fair Trade falls amongst a number of other ethical factors that form subcategories of conscientious consumerism. Examples include environmental issues, child labour and animal welfare amongst others.

Fair Trade as a Marketing Strategy

Every year, an increasingly large number of consumers demand their products to be fair trade. Without the means to ensure such status by their own means, consumers rely on non governmental organizations to certify corporations that actually comply with fair trade principles. It goes without question then, that large firms have seen the light in using Fair Trade as a marketing strategy. By presenting themselves as a Fair Trade compliant corporation, they acquire the patronage of an entire genre of conscientious consumers.

Who does Fair Trade Affect

The Third World Producer

Fair trade is a strategy for poverty alleviation and sustainable development. Its purpose is to create opportunities for producers who have been economically disadvantaged or marginalized by the conventional trading system. The fair trade movement attempts to increase the prices that producers in developing countries receive for the goods they sell . Other goals include better credit, increased stability of earning, and promotion of institutional “capacity building”. The movement also wants to increase awareness, amongst consumers in richer countries, of development issues.

The First World Consumer

Since consumption of Fair Trade products is entirely voluntary, it does not harm consumers – they still have the option of purchasing non-Fair Trade products. Fair Trade brand creates a differentiated product, a “credence good” (one whose value depends in part on what the consumer believes about the product, rather than its intrinsic qualities). By effect of paying more for a Fair Trade product, the consumers make a (small) donation to producer (equal to the price premium). This could be an efficient way to transfer income from the rich to the poor. Many consumers are willing to make the small donation (a kind of implicit tax), so aggregate transfer might be large.

Non Fair Trade Products

Fair Trade certification creates a market niche, but is unlikely to alter over-all demand (absent changes in price). The amount of consumption and production that shift from non-Fair Trade to the Fair Trade market must be equal (supply = demand). As long as Fair Trade producers sell some product in the non-Fair Trade market (so that their marginal price equals the price of regular product), the original (pre-Fair Trade) market price remains an equilibrium. In other words, there is no presumption – using economic logic -- that Fair Trade should increase supply and depress prices (when Fair Trade producers also sell in non-Fair Trade market).

A Brief History

Post WWII, worsening “terms of trade” for commodity producers means that the ratio of the price of their exports to the price of their imports falls, since producers’ welfare depends on relative, not absolute prices.

This fall lead to a fall in primary commodity producers’ “real wage”, defined as the number of “baskets of consumption goods” a producer can obtain by selling a unit of labor. For example, the fall in the price of coffee lowered the wage (and the income) of coffee producers.

Throughout the 60s- 90s there were attempts to introduce policies and institutions that would mitigate the effects of worsening terms of trade for commodity producers. Scholars and politicians proposed constraints on free trade to help developing countries’ economies. Examples of these include the Bretton Woods Accord (1944), The Havana Charter (1948) and the Import Substitution Industrialization (ISI).

These constraints however, failed to restructure global inequities but did help many countries make progress. In response, Alternative Trade Organizations (ATOs) began to form and started to play a large role in activism for fair trade among socially conscious individuals, church groups and social justice organizations.

In 1989, The World Fair Trade Organization was formed, then known as the International Fair Trade Association (IFAT). It was the first umbrella organization to unite and coordinate diverse fair trade businesses and organizations that had a shared set of principles and criteria, primarily a commitment to 100% fair trade. Members included Ten Thousand Villages and Equal Exchange.

In 1997, The Fair Trade Labeling Organization, now called FairTrade International, was formed as a second major umbrella organization for fair trade organizations. Aimed to coordinate and certify members, it designated “Fairtrade” name to distinguish itself and Established FLO-CERT in 2004 to take over certification as membership grew.

What does the future hold?

The gnawing question critics of Fair Trade always ask is what will it ultimately be? Will Fair Trade actually manage to achieve its goals or is it doomed to failure like those before it at the hands of the large corporations?

The answer, it seems, lies in how Fair Trade is defined. Where some organizations insist on 100% acquisition of products from Fair Trade defined producers, others have skewed the definition to cater to corporate needs, certifying large corporations of being Fair Trade compliant when a majority of their product is acquired from large commercial plantations and not fair trade approved producers.

In the end, it depends on the consumers to decide which direction to go to, whether to support strict Fair Trade or bend to corporate culture.